Financial Services for the Masses

JP Morgan has gotten considerable attention in the press for a recent statement that serving clients with less than $100,000 in assets is unprofitable. Not surprisingly, one response to this statement has been to frame it in terms of the message that financial institutions just want rich clients and don’t want to spend their time working with the small guy. The broader story is quite interesting and has long-term implications for both financial services firms and their clients.

Smaller customers (those with less than $100,000 in the bank) are looking less attractive as clients these days for two reasons:

Low interest rates mean that a bank makes less money on its deposits.

New regulations have capped the fees that banks can charge for a range of services.

Enormous CEO salaries notwithstanding, it is certainly true that almost all financial services are becoming less profitable for service providers. The brokerage business is a case in point. Traditional full-service brokers, where you call the broker and he places the trade for you, can charge hundreds of dollars per trade. At a discount online broker, the cost per trade is typically under $10. Technology has simply shifted the landscape and there is no going back. The current low interest rate environment certainly makes the problem worse, of course.

The really big-picture question is how people who are not affluent will get good financial services at a reasonable price. There is little question that the financial industry provides a range of crucial services. There is also little question that in the current dominant business models for financial services, having a smaller number of wealthy clients is much more attractive than having a larger number of average clients. Thinking outside of financial services, however, there are clearly a range of businesses that have been immensely successful by targeting less affluent clients as their main audience. Think of Walmart or Costco. Retailers like Macys and Nordstrom serve more affluent customers than Walmart and Costco, but Walmart and Costco are very profitable. The Walmarts and Costcos of the world have different ways of doing business than the Macys and Nordstroms.

The same will clearly be true in the financial services industry. From banking to investment advice, financial services business are figuring out how to profitably serve the vast majority of financial services customers who are not rich. Those companies that figure out how to provide a good product or service at new lower price points will be richly rewarded. The financial services firms that simply narrow their focus on a smaller and smaller pool of wealthier clients will find themselves in an increasingly competitive situation.

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